Annual Review 2006

2005-06 The Year Under Review

Production

Unaware of the severe effects of the frost in the coming months, PSMA was optimistic in forecasting sugar production of just over 3.0 million tonnes against the domestic consumption estimated of 3.9 million tonnes.

Continuation of the last year’s short production, the frost attack further deteriorated the situation. As usual, the sugarcane price immediately sparked the situation, with the result that sugar market started reflecting the production cost, which had always been a sensitive issue for the Government.

Right in this meeting last year, a million tonne shortage of sugar was forecasted based on the official information for production of sugarcane crop. The need for the import of raw sugar was also ascertained to supplement the production. The severe frost attack on sugarcane crop in Northern Punjab and NWFP further disturbed the supply of quality sugarcane. Beside the above loss the lucrative business of Gur making flourished as the demand was high at home and Afghanistan seriously hurting the milling sector.

Overall situation remained below average as 30.00 million tonnes of sugarcane was utilized by the mills to produce 2.58 million tonne of sugar, supplemented by 372,500 tonnes refined from raw sugar and a marginal addition of only 8,700 tonnes from beet. Thus the total production was registered at 2.964 million tonnes, apparently below 50% of the production capacity of the mills, thus Pakistan experienced second crop disaster in a row.

Sugar Price Structure & Crises

The Government of Pakistan supports the cane production by setting a market support price announced before or after planting. The local demand is always above the minimum price fixed as a result mills renegotiate the procurement price. Provincial Governments in 2005/2006 increased the official cane purchase price for 40 kilograms to Rs 45/- for Punjab & NWFP and Rs. 48/- for Sindh. Sindh Government later revised this price to Rs. 60/-. However, during the entire season the price fixation remained a volatile issue between the growers and the millers. The growers refused to sell the cane at the official price and millers in some areas of Punjab and Sindh were forced to delay the start of crushing season.

The milling sector ended up bearing the bulk of the risk when the circumstances changed. While the support price varies significantly when there is shortfall during a particular harvest, there is no similar level of adjustment when the harvest is good and cane is in abundant supply.

With intermittent stoppages the season’s cane price averaged to Rs. 80/- in Punjab and up to Rs. 95/- in Sindh province resulting in a significant rise in the production cost to above Rs. 32/- to 34/- per kg without addition of 15% sale tax which was immediately reflected in the market sentiments and retail sugar market shot up to Rs. 38/- to Rs. 40/-.

The unprecedented increase in the minimum support price in the province of Sindh triggered the situation in the whole country. Increase of sugarcane price twice in the same crushing season by about 50% encouraged the growers to further dictate cane prices and cartel supplies.

As a result of the situation the sugar market immediately started reflecting the trend in sugar prices, the sugar production was also termed as deficit by about a million tonne.

The disturbance in the sugar market was immediately noticed by the Government concerned authorities who labeled the millers as profiteers involved in cartel under declaring the sugarcane procurement and production of sugar.

The Government was candidly informed of the situation and the deficit of sugar for the season to arrange import of the required quantity of the sugar, who beside allowing duty free import of raw and refined sugar approved import of about 850,000 tonnes of sugar by TCP for sale and distribution through Government managed outlets, with an obvious objective of subsidizing the sale to bring the market prices down.

The unlimited import of refined sugar to the tune of 1.5 million tonne along 0.5 million tonnes of raw sugar already refined has now converted the 1.0 million tonnes deficit year into a million tonne surplus year.

The situation thus developed hampered the economy of all concerned and the over sensitiveness has resulted the year ending with large stocks held by TCP, Mills and by the traders who imported sugar at high price.

Ironically the international prices started subsiding as soon as Pakistan had enough of self-dumped sugar.

The sugar crises during the year caused the industry face the blame game with all Government agencies actively involved. In this connection few actions are being mentioned without going in to details.

• Monopoly Control Authority charged the sugar mills for cartel of sugar and registered cases against mills for their sale being below the desired assumed percentage by the MCA.
• National Accountability Bureau was asked to investigate corrupt practices leading to the sugar crises in the country. The investigation was later withdrawn.
• CBR appointed custom-armed staff at the mill’s gates to supervise and monitor procurement of sugarcane and the sale of sugar looking for tax evasion and sale to unregistered buyers. The monitoring was withdrawn with the end of crushing.
• State bank of Pakistan imposed 50% margin restrictions for financing against the security of sugar stock and instructed for immediate adjustment of all advances against the security of sugar stock. The final date for adjustment was later extended from 31st July to 31st Oct’2006.

After the hectic meetings at PSMA and with the concerned Government officials some of the restrictions have eased down.

Government intervention through bringing down the import duties, subsidizing the supplies through its outlets and blaming the industry hardly matters without taking necessary measures to support production of a better crop in a competitive environment.

Past experience and record shows that the sugar price has been moving up and down inversely proportional to the quantum of the sugarcane and same was the affect on the price of Gur where no factories are involved, contains impurities and remains tax free.

The graph hereunder clearly indicates that the factor controlling the sugar price is the quantum of sugarcane, the main raw material. Sugar production totally dependent on the sugarcane production has always reflected the weak link in the overall value chain.

OUTLOOK 2006-2007

Per data provided by the MINFAL there is 14% increase in the plantation area of sugarcane. Cane production had dropped significantly in the past two years in a row limited to 44 million tonnes. The increase in the plantation area along promising weather conditions i.e. supply of irrigation water & rains sugarcane production is expected to over 50 million tonne which ensures increase in the sugar production to about 3.5 million tonnes.
Though cane production in 2006-07 shows better prospects yet the utilization of sugar mills will remain around 50% capacity provided 40.0 million tonnes supply is made to the mills.

Government of Punjab has already announced indicative minimum price of sugarcane as Rs.60/40 kg, which means that delivered price at the mill-gate with the inclusion of transportation, cess and price competition would be around Rs.70/40kg on average. Sindh Government has also recently announced Rs. 67/40kg and NWFP Rs. 65/40kg.

With such enhanced sugarcane price the production cost of sugar cannot be less than Rs.34/kg ex mill i.e. retail price expected to a minimum Rs.38/kg. Confusion prevails over the price structure due to the following reasons, which have been brought to the attention of Government of Pakistan at a higher level

1. 2005-06 a deficit year of sugar production by one million tonne ended with a surplus of over one million tonnes.
2. Crushing season 2006-07 starts with a carryover stock of 1.3 million tonnes.
3. 2006-07 producing 3.5 million tonnes will have availability of 4.8 million tonnes against a consumption of 3.9 million tonnes.
4. Major stock held at the end 2005-06 belongs to TCP which Government intends to off load at a highly subsidize rate to the market threatening the domestic sugar price.
5. International sugar market prices are down where as Government of Pakistan has yet to clampdown any import duties to stop further inflow.

Whereas the industry bears a strong feeling to pay better sugarcane prices to ensure a better sugarcane crop in future there is confusion as how to maintain a balance in the minimum indicative price and a matching production cost. Government has been approached at several occasions explaining these issues of utmost importance.

Despite these hurdles government of Sindh has already issued directions for an early start of crushing on 1st Oct’2006. As a regular phenomena every year millers are pressurized for an early start of the crushing with the plea to vacate some portion of the land from sugarcane for the sowing of wheat, whereas the millers resists to accept the plea for the reason that the sugarcane quality at the early season is of very low recovery, the fact is very well known to the all concerned Ministries and the growers as well who irrespective of the facts force for the early start as the payment system of sugarcane has still continued based on the weight and not the quality.

Per our estimates early start of the sugar mills with the low recovery is causing a loss of minimum 150,000 tonnes of sugar costing mills billion of rupees, which is a phenomenal loss to the industry and the country.

Overlooking the technical and the positive aspects in favour of the late start, the main cause can be spelled out as the row between the Growers and the Millers over the price hike and the non- availability of the crop. Shortage and the immaturity of the crop in the beginning normally results the early closure of the season at the higher recovery period. An adverse step for achieving the optimum production.

Later the Sugar prices in the International market started sliding down due to big global supply and soft demand. The prices sunk by almost 25% since July’06 after touching US$ 490/- a tonne down to US$ 370/- in Sept’06. The prices started ascending in Nov’05 right at the beginning of the season 2005-06 from US $ 288/-, apparently over Speculations and sudden large demand.

London white sugar featured peak in July when it hit record US$ 498/- a tonne. Raw sugar had its 25 years peak price of 20.46 US cents/lb at New York market in February with the news of drought in many sugar producing countries. The prices rose and tumbled sharply during the year.

2006-07

Global production estimates for the year 2006-07 shows a surplus of about 3.0 million tonnes against a similar amount of deficit last year (2005-06).

The global stock/consumption ratio which has always played a pivotal role over the global sugar prices will remain low and could cause price rise in the future year for the 10% estimated production fall in Australia due to smut and the ongoing drought in the Central and South Brazil, which might reduce the season’s output as well as cane supply for sugar production.

India is expecting its record sugar production of over 23.0 million tonne in the year and is about to lift ban on export of at-least 2.0 million tonne out of its surplus, unhappy over the fall of international prices now matching its production cost.

EU sugar output is expected to fall from 22.0 million tonne down to 16.5 million tonne in 2006-07 due to E.U sugar regime reforms suggesting price slashing.

Presently the world production is expected around 2.5 million tonne higher than the consumption for the first time since 2002-03. Consumption and stock ratio is expected to grow nominally to about 38.5% having significant affect on the prices.

Conclusions

• Sugarcane plantation area (906,988 Ha) for the year 2005-06 was the lowest in the past decade after 1992-93 when the plantation area was 885,000 Ha
• Low plantation area coupled with the frost attack resulted in low yield, the sugarcane production was limited to only 43.5 million tonnes
• Sugar production for the year remained below average producing 2.58 million tonne of cane sugar supplemented by refining of raw sugar and a small quantity of beet sugar. The total output remained within 2.964 million tonnes i.e. 50% of the production capacity
• For millers & growers both, the year was the second crop disaster in a row. Low sugarcane production increased the demand and the high cane price caused the sugar production cost to a record high.
• Duty free import of unlimited raw and refined sugar was allowed to fill the gap and bring the domestic prices under control.
• By the end of the year 1,581,000 tonnes of refined sugar and 454,000 tonnes of raw sugar has been imported. Such a large quantity import had significant effect on the international prices while the year was considered as global deficit.
• At the same time the year ended with a glut like condition. End September stock at mills were at around 445,400 tonne, at TCP godowns 660,000 and other importers holding about 200,000 tonnes, with further supply of 128,000 expected shortly by TCP.
• Domestic sugar falling price, release of stock by TCP at subsidize rate, duty free sugar import condition along SBP new financial restrictions jeopardized the start of new crushing season.
• After challenging meetings at the concerned ministries and SBP the Prime Minister of Pakistan was approached through a letter apprising him with the total scenario.
• Details were further discussed at the Federal secretaries meetings seeking stabilization of domestic sugarcane and sugar prices and fixing appropriate crushing dates practically possible.

Following the discussion between the secretaries committee of Government of Pakistan comprising Secretary MINFAL, Secretary Industries, Secretary Finance, and Secretary Commerce held on 3rd and 4th Oct.’2006, the main points resolved were as under:-

• All sugar mills in Sindh province will start crushing in the 1st week of Nov.’2006 while Punjab & NWFP will start the crushing campaign after mid of Nov.’2006
• The minimum indicative price of sugarcane were approved as following
  ? Sindh Rs. 67/40kg
  ? Punjab Rs. 60/40kg
  ? NWFP Rs. 65/40kg
• Government of Pakistan will issue directive to the State Bank of Pakistan to ensure that the banks provide financing to the sugar mills without undue and additional security margin conditions
• While it was agreed that TCP will continue to play its interventionist role to guard against escalation of sugar prices in the domestic market, the Government of Pakistan will take necessary steps to clamp measures to control & guard against disruptive dumping of imported sugar in the domestic market.
• Quality Premium applicable in Sindh was suspended for the season 2006-07. Further decision for its removal through the system of sugarcane payment on quality basis will be worked out for adoption throughout Pakistan.
• Last but not the least, it was decided that all issues pertaining to the sugar industry will be resolved by the Government in consultation with PSMA, and the Industry to ensure that the retail price in domestic market remains stable.

With the start of the new sugar year 2006-07 we hope that Government of Pakistan and the Provincial Governments will take extensive research and development work for the sugarcane crop with the participation of PSMA to develop better yield & recovery and improve the economics of sugarcane growers by increase in per acre yield while the industry will be more competitive in producing more sugar due to the increase in sugar recoveries to meet the national demand.

At conclusion I would like to thank the Zonal Chairmen and Members of the Central & Zonal Committees for their co-operation. At the same time I wish the new management of PSMA a success and assure them my co-operation.